Financial Markets, Investors and the Investment Process

Question 1

Name the three functions of stock market indexes

Answer 1

1. To measure performance
2. To serve as a benchmark
3. To derive secondary products to sell

Question 2

Explain a price weighted index

Answer 2

Index in which each component of the index is weighted according to its current share price

Question 3

Explain a market cap weighted index

Answer 3

Index in which each component of the index is weighted according to its capitalization as a share of the market capitalization

Question 4

Capitalization formula

Answer 4

Shares outstanding * share price

Question 5

Weight in market formula

Answer 5

w = S*P/Total MC
Capitalization / Aggregated Market Capitalization

Question 6

What is a market cap weighted portfolio?

Answer 6

A portfolio where you hold shares according to their respective weights in the market ($ = w * total investment)

Question 7

What is an equally weighted portfolio?

Answer 7

A portfolio where you hold the same amount of money of each stock ($ = investment / # securities)